Carousel fraud victory for Customs

The government has won another victory in its fight against VAT "carousel" fraud which has cost it billions of pounds in stolen revenues in recent years.

Revenue & Customs yesterday said it had won a case brought against it in the high court by three firms arguing it had acted illegally in refusing VAT repayments to them. The case concerns a new variant of carousel fraud known as "contra" or "offset" trading of small, high value goods such as computer chips or mobile phones.

In ordinary carousel fraud, such goods are repeatedly imported and exported from Britain or other EU countries, with the VAT being reclaimed each time the goods are exported and not paid to the tax authorities at the point of import.

This has hit most EU countries hard and the European commission estimates more money is lost to carousel fraud each year than the €50bn (£34.2bn) spent on the common agricultural policy.

And now the fraudsters - often organised crime gangs backed by the Russian mafia - have developed "contra" trading scams where they run a number of inter-linking carousels across several borders to offset paper losses in one country against profits in another, making it more difficult than ever to track them down.

The firms who brought the case against Revenue & Customs, Just Fabulous, Evolution Export Trading and Brayfal, argued that they could not have been expected to know that fraud was taking place in a different chain of transactions than the one they were trading in. Under a ruling from the European court of justice last year, known as the "Kittel" ruling, HMRC must deny VAT repayment to firms who knew or even merely should have known that some VAT fraud was taking place in the trade chain they were involved in. This gave HMRC a powerful new weapon.

The sums involved are huge. The government takes in about £140bn a year in VAT and refunds nearly half that to firms, so billions of pounds are flowing through HMRC all the time hence the attraction for fraudsters.

Mr Justice Burton ruled in favour of HMRC which had argued that the Kittel principle applied to contra-trading as well. HMRC welcomed the decision: "Fraudsters are deliberately complicating their activity in an attempt to thwart HMRC's actions. This judgment supports our ability to effectively tackle ... fraud," said a spokeswoman.

"Denying input tax claims to those connected with, and with knowledge of, the fraud remains a key component of our strategy. We will continue to verify repayment claims in a proportionate and reasonable manner, including those claims arising from contra-trading transactions where it is suspected they are connected with ... fraud."

The judge also denied the firms' application to take their case to the ECJ.

Earlier this year carousel fraud was costing the HMRC £100m a week and losses threatened to exceed £10bn this year.

But a new drive by HMRC to clamp down on VAT repayments and the closure of a bank in Curacao used by the fraudsters to run their carousels caused the scam to collapse, in Britain at least.